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Federico Forte

Principal Economist, BBVA Research, Argentina


Navigating the Monetary Policy Easing in 2024.

After two years of increasing interest rates worldwide, 2024 brings a shift in market focus towards the pace and timing of monetary policy easing across the different economies. 

In the case of the United States, the reduction of rates is expected to begin around mid-2024, possibly starting in May or June if the price indicators evolve as anticipated by the Federal Reserve (FED). A similar trajectory is forecasted for the European Central Bank, albeit with a potentially more dovish stance due to the relatively weaker performance that the Eurozone displays in terms of economic activity. BBVA Research projects the FED ‘s monetary policy rate to reach 4.5% by end-2024 (from 5.50% today), while the ECB’s reference rate is forecasted to decline from 4.5% to 3.75%.

In line with this global context of monetary policy loosening, most Latin American Central Banks are likely to follow suit. The main monetary authorities in the region had been very fast and decisive to hike rates and keep inflation under control. Domestic currencies have proven to be resilient, and inflation expectations remained relatively well anchored, hence there is room for cutting rates in the majority of these countries (such as Brazil, Mexico, or Chile). In general, Inflation has not yet reached the desired targets, but ex-ante real interest rates stand at sufficiently tight levels to curb price dynamics towards the proper direction. For these reasons, monetary policy rate cuts are expected across the region this year, with Central Banks’ officials always keeping an eye on the evolution of the monetary conditions in the advanced economies.  

In a world with lower monetary policy rates, investors are expected to gradually become less risk-averse and begin to search for yield across the different asset classes. This behavior will probably boost emerging markets’ bond prices and reduce sovereign spreads throughout this year and probably the following.

Nevertheless, several risk scenarios are latent and could arise down the road. A stubbornly high inflation may delay rate cuts more than expected, due to, for example, resilient price pressures in the energy sector or some services. This type of event could trigger volatility, in a context of markets that currently are in a quite optimistic mood. On another note, economic activity in advanced economies can experience a more acute downturn than expected or an episode of financial distress is plausible in a context of high rates. Geopolitical tensions remain a constant concern in the modern world, thus potential spikes in tension between some countries could affect commodity prices (food and energy, mainly) and keep inflation higher for longer. Finally, there are elections in countries that represent 49% of world population and 60% of global GDP, making 2024 a fundamentally political year. Some of the main leaderships in the world can significantly change, altering the current balance of international linkages within the different regions. On a positive note, usually the election years are characterized by lower rates and a bit higher dose of optimism in the markets. 

Overall, the general economic outlook is tilted towards optimism with expectations of lower rates and relatively high probabilities of a soft landing in inflation and economic activity. However, many potential risks remain latent, so it is mandatory to be prepared and develop alternative strategies to react fast in case of the materialization of some of the depicted scenarios. Enjoy the ride, but remain vigilant!


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